Retirement plan sponsors have to conquer a great number of
fiduciary and plan design basics when setting up a plan, but they might not
think about the many misconceptions that participants have about retirement
plans and retirement saving—which could be an impediment.
Two of the biggest misconceptions that keep workers from
participating in retirement plans are that they are too complicated and that
the worker is too young to care about a milestone decades down the road.
“Some of the very most harmful misconceptions that participants
have, have to do with the feeling that retirement plans are so complicated that
they cannot make prudent decisions,” says Molly Beer, an executive vice
president in the retirement plan consulting practice at Gallagher in Chicago.
“The mere idea of using the plan to get themselves to retirement can often feel
Related to this is the thinking among young participants
that retirement is so far away that they don’t need to start saving now, says
Christian Mango, president at Financial Fitness for Life, a financial wellness
provider, in Winchester, Massachusetts.
“Even $1 grows, and the later you begin planning and saving
for retirement, the more difficult it is to save enough,” he says. “Being
invested and letting the money generate compound interest is the name of the
While these and other misconceptions, like what deferral
rate to choose, can be largely stamped out through automatic enrollment and
automatic escalation, advisers say, it is not enough to use auto-features
without also providing communication and advisory support. Participants need
education and individual financial planning to fully appreciate and make the
best use of their plan, experts note.
Besides getting participants into the retirement savings
game, automatic features free them up to work with advisers on their immediate-
and short-term financial needs.
“This means advisers can focus on individual financial
coaching as opposed to general education, which participants may or may not
benefit from,” Beer says.
Another potentially confusing feature of retirement plans
that precludes people from participating is the vesting schedule, especially
when a participant will not receive the employer match for years, notes Erik
Daley, managing principal at Multnomah Group in Portland, Oregon.
On top of this, he adds, there is no single agreed-upon
calculation for the retirement income projections that retirement plan
recordkeepers will be required to begin providing this fall, under the Setting
Every Community Up for Retirement Enhancement (SECURE) Act.
“While the intention and purpose of these projections is
good, the assumptions going in will greatly diverge and could confuse some
participants and give others a false sense of security,” Daley says. “Some
participants may even think these projections are a guarantee of income.”
Another misconception, says David Swallow, managing director
of consulting relations and retention at TIAA in Tampa, Florida, is that
low-cost investing is superior and that it will always lead to higher portfolio
balances—and even a larger pot of money at retirement.
“We think low-cost investments should be part of a
diversified lineup, but they don’t always translate into better performance,”
Hand-in-hand with this challenge is participants’ pursuit of
the current best-performing funds, Daley says. Those funds might look good now,
but that doesn’t mean they’re the best option.
On the subject of annuities, Swallow says the retirement
plan industry is now coming around to the idea of prompting those who reach
retirement to purchase an annuity outside of the plan. Through its many
surveys, TIAA has found that 69% or more of employees place guaranteed income
as a top retirement goal, Swallow says.
“But if they wait until retirement, they will pay retail
prices, and the psychological hurdle of purchasing an annuity at that point
will keep them from taking that step,” he explains. “We think sponsors should
give participants the opportunity to have lifetime income options in the plan.
That gives people financial confidence. Purchasing an in-plan annuity minimizes
peoples’ risk and increases their retirement income. That said, participants
need to assess what is right for their particular situation.”
Then there is the issue of fees. “A prevalent misconception
among participants is the notion that the retirement plan has no fees,” Daley
says. On the flip side of this, some participants think they need to go with
expensive investment options with advice embedded in, such as managed accounts.
“This could lead to the participant being sold a service or a product they
don’t need,” he adds.
Adequate deferral rates are also critical, says Michael
Montgomery, managing principal at Montgomery Retirement Plan Advisors in Tampa,
“It is faulty for employees to think that investment returns
are more important than what they are putting into the plan,” Montgomery says.
“How much they save is just as critical.”
Because many participants mistakenly think the default
deferral rate—potentially only 3% or 4%—is an adequate savings rate to achieve
retirement security, sponsors and advisers need to educate them that the actual
total rate should be 10% to 15% of their salary each year, including any
“Otherwise, a 3% deferral rate is a disservice to
participants,” Montgomery says.
Finally, there are those participants who are averse to risk
and volatile markets and who avoid equity investing at all costs, says Matthew
Eickman, national retirement practice leader at Qualified Plan Advisors in
“Given the three major stock market corrections over the
past 20 years—the technology bubble bursting, the financial crisis and
COVID-19—many younger participants have been invested far too conservatively,”
According to Daley, most participants, especially
near-retirees, need education to understand what they have and what their
options are—such as what Social Security may provide them or what health care
supplemental insurance they will need besides Medicare. “People age 50 and
older will be more receptive to such education,” he adds.
“First and foremost, there is a financial literacy problem
in America,” Mango concludes. “We have to tackle the financial literacy problem
from a number of angles. Our schools need to mandate financial literacy as part
of their curriculum, and employers need to support overall holistic employee
well-being. A critical part of that is financial wellness and education.”
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